Recently, Google announced that it was creating an operating system to work on the new small netbook computers. Netbooks are the only part of the PC market that is growing today. Google hopes to introduce an operating system there in order to serve as a stalking horse to slip into Microsoft’s share with desktop and notebook PCs.
Also, Cisco has let it be known that it was considering offering a rival to Microsoft’s Office software. This service would let business users create documents they could draft and share through Cisco’s WebEx meeting and collaboration service. Google has already attempted to best Microsoft in the Office world with its Google Apps internet-based alternative. Google has yet to create much traction with this product. The outlook for Cisco’s product must wait until it actually appears. But the point here is al the new competition.
Why is Microsoft seeing so much new competition in markets where it is the overwhelming dominant leader? Because its prices are so high. It is drawing competitors into the marketplace who want a piece of Microsoft’s enormous profit base. (See Audio Tip #119: A Price Umbrella on StrategyStreet.com.) These competitive forays are likely to continue as long as Microsoft holds the high price umbrella over them. These new competitors have a mighty mountain to climb, so they might not succeed. On the other hand, one of them just might and create real pain for Microsoft. Linux has already damaged Microsoft in some of the large markets that Microsoft serves. (See Audio Tip #102: When is Price Likely to go Down? on StrategyStreet.com.)
Interestingly, Cisco specifically stated that it was not interested in competing with Salesforce.com in selling online applications for corporate users. You probably wonder why. So did I. Here’s why. Microsoft has the following results on a trailing twelve month basis: Operating Margins 37% and Return on Equity 42%. In contrast, Salesforce.com has these results on a trailing twelve month basis: Operating Margins of 7% and Return on Equity 9%. I guess the price and profit umbrella held up by Salesforce just doesn’t allow even big companies to crawl in underneath.
Monday, July 13, 2009
Thursday, July 9, 2009
Microsoft Gets Price Warnings from its Customers
Microsoft is introducing Windows 7 to replace its unpopular Vista operating system. The company is at logger heads with its PC manufacturing customers over pricing for the new software.
Here are two of the problems. First, Microsoft intends to charge $50 for an entry level version of the operating system, called Windows 7 Starter Edition, which is triple the price the company gets for the cheapest version of Windows out now. Microsoft charges between $60 and $150 for Vista today, but the PC manufacturers can use the older Windows XP for roughly $15 for netbooks, the only growing sector of the PC market. If Microsoft raises the price for the cheapest operating system to $50, the PC makers have to raise their prices or lose all the profits they have on the netbooks. Second, Microsoft plans to charge an additional $200 for the Windows 7 Home Premium edition. This additional cost would increase the price of a mid-range PC by 50%, from around $400 to about $600.
The PC customers have seen significant changes in their market. Competition has increased and prices have fallen. The average notebook, the source of most profits in previous years, has seen a price decline of about $800 from $1400 in 2004. The average notebook now costs less than the average desktop.
These PC manufacturer customers have an important message for Microsoft. (See Video #1: The Two Best Consultants in the World on StrategyStreet.com.) They are Microsoft’s key channel of distribution. The customers are telling Microsoft that, if the company charges these prices, sales volumes will fall for both the PC manufacturers and for Microsoft. Microsoft would be well advised to listen to these customers since Microsoft makes a lot more on the average PC than does the PC manufacturer. Microsoft can not, for long, operate at cross purposes with these PC manufacturing customers. High prices to these customers push them to alternative software suppliers. (See Video #7: Constraints on the Ability of Competition to Expand on StrategyStreet.com.)
Here are two of the problems. First, Microsoft intends to charge $50 for an entry level version of the operating system, called Windows 7 Starter Edition, which is triple the price the company gets for the cheapest version of Windows out now. Microsoft charges between $60 and $150 for Vista today, but the PC manufacturers can use the older Windows XP for roughly $15 for netbooks, the only growing sector of the PC market. If Microsoft raises the price for the cheapest operating system to $50, the PC makers have to raise their prices or lose all the profits they have on the netbooks. Second, Microsoft plans to charge an additional $200 for the Windows 7 Home Premium edition. This additional cost would increase the price of a mid-range PC by 50%, from around $400 to about $600.
The PC customers have seen significant changes in their market. Competition has increased and prices have fallen. The average notebook, the source of most profits in previous years, has seen a price decline of about $800 from $1400 in 2004. The average notebook now costs less than the average desktop.
These PC manufacturer customers have an important message for Microsoft. (See Video #1: The Two Best Consultants in the World on StrategyStreet.com.) They are Microsoft’s key channel of distribution. The customers are telling Microsoft that, if the company charges these prices, sales volumes will fall for both the PC manufacturers and for Microsoft. Microsoft would be well advised to listen to these customers since Microsoft makes a lot more on the average PC than does the PC manufacturer. Microsoft can not, for long, operate at cross purposes with these PC manufacturing customers. High prices to these customers push them to alternative software suppliers. (See Video #7: Constraints on the Ability of Competition to Expand on StrategyStreet.com.)
Monday, July 6, 2009
Rising Prices in the Face of Falling Demand
Steel demand is down…by a great deal. The world’s steel plants are operating at less than 45% of capacity. This operating rate is one of the lowest ever. Yet, some U.S. stainless steel makers have actually raised prices by 5 to 6% since early May. The price increase does not come because of an increase in demand for stainless steel. That demand is off as well.
How do we explain this phenomenon? The answer lies in the cash costs of the stainless steel companies and their customers. (See Diagnose/Pricing/Company Price Environment on StrategyStreet.com.) There are high levels of fixed cost in the stainless steel business. Many of these costs, though fixed, are cash costs that must be paid to keep the plant running. Heating units cannot be shut down easily. Yet, the cash cost of keeping them operating are high. If the plants cannot cover their cash costs, they will close in short order. But, despite the losses that the stainless steel producers are piling up in this period of very low demand, they have raised their prices to cover their fixed cash cost of operating their plants on lower unit volume. The price increases of 5 or 6% represent the increases in cash revenues the companies need in order to keep their plants operating.
Normally, these plants would have shut down at this level of economic activity. Their places would have been taken by off-shore manufacturers who incur lower cash costs to operate. But conditions have changed. Customers are changing their suppliers, replacing off-shore producers with domestic supply. Now the American manufacturers have a lower cash delivered cost than do the off-shore competitors they are now replacing. We then ask, why would a customer be willing to pay domestic manufacturers 5% more than they were paying before May?
Steel service centers are major customers for stainless steel. These are the companies who are paying the higher prices to the domestic manufacturers today. They are paying these higher prices for three, cash-related, reasons. First, even at today’s low level of demand, there is enough demand to pass along the cost increase. Second, the capital markets are often closed to these service centers. They cannot get the financing that would allow them to purchase the same amount of steel off-shore that they would be able to purchase in a normal market environment. Third, purchasing foreign steel involves a long term exposure to the price of steel and its demand. Steel that a service center orders today from an off-shore producer will not arrive at the service center for months. These service center customers are unwilling to bear the exposure to the potential fall-off in steel demand, and the resulting fall in spot prices, for steel over the next several months.
So, basic cash economics explains the price in today’s domestic stainless steel market. The domestic manufacturers are able to raise their prices by 5% to keep their plants operating at cash break-even. They replace off-shore producers whose delivered cost to the stainless steel service center customers is now higher than those of the domestic manufacturers. (See Diagnose/Pricing/Industry Price Outlook on StrategyStreet.com.)
How do we explain this phenomenon? The answer lies in the cash costs of the stainless steel companies and their customers. (See Diagnose/Pricing/Company Price Environment on StrategyStreet.com.) There are high levels of fixed cost in the stainless steel business. Many of these costs, though fixed, are cash costs that must be paid to keep the plant running. Heating units cannot be shut down easily. Yet, the cash cost of keeping them operating are high. If the plants cannot cover their cash costs, they will close in short order. But, despite the losses that the stainless steel producers are piling up in this period of very low demand, they have raised their prices to cover their fixed cash cost of operating their plants on lower unit volume. The price increases of 5 or 6% represent the increases in cash revenues the companies need in order to keep their plants operating.
Normally, these plants would have shut down at this level of economic activity. Their places would have been taken by off-shore manufacturers who incur lower cash costs to operate. But conditions have changed. Customers are changing their suppliers, replacing off-shore producers with domestic supply. Now the American manufacturers have a lower cash delivered cost than do the off-shore competitors they are now replacing. We then ask, why would a customer be willing to pay domestic manufacturers 5% more than they were paying before May?
Steel service centers are major customers for stainless steel. These are the companies who are paying the higher prices to the domestic manufacturers today. They are paying these higher prices for three, cash-related, reasons. First, even at today’s low level of demand, there is enough demand to pass along the cost increase. Second, the capital markets are often closed to these service centers. They cannot get the financing that would allow them to purchase the same amount of steel off-shore that they would be able to purchase in a normal market environment. Third, purchasing foreign steel involves a long term exposure to the price of steel and its demand. Steel that a service center orders today from an off-shore producer will not arrive at the service center for months. These service center customers are unwilling to bear the exposure to the potential fall-off in steel demand, and the resulting fall in spot prices, for steel over the next several months.
So, basic cash economics explains the price in today’s domestic stainless steel market. The domestic manufacturers are able to raise their prices by 5% to keep their plants operating at cash break-even. They replace off-shore producers whose delivered cost to the stainless steel service center customers is now higher than those of the domestic manufacturers. (See Diagnose/Pricing/Industry Price Outlook on StrategyStreet.com.)
Thursday, July 2, 2009
Industry Evolution Forces Cost Management
The evolution of a market often brings new consumers who prefer, or can afford, only low-priced products. In order to reach these consumers, a company must reduce its costs while it grows.
The British confectionery firm Cadbury dominates the Indian chocolate market. It has 70% market share in the chocolate market and a 30% share of the confectionery market in India. The company began operations in India in 1947. They imported its chocolate bars and sold them to the very wealthy. Later, it developed its own factories in India.
As the Indian market develops, more consumers and potential consumers enter the chocolate market. The growth in the market comes with consumers who live outside the major cities and who have very low incomes. In order to reach these consumers, Cadbury has to offer products that it can sell at very low prices. (See Diagnose/Products and Services/Innovation For Customer Cost Reduction/Four Price Points on StrategyStreet.com.) To meet these new consumers, the company has developed a product called Cadbury Dairy Milk Shots. These are small chocolate balls that are covered with a sugar shell. A package of two of these balls sells for about $.04. But these low-priced products still drive growth.
But Cadbury can not reach these new consumers with very low-priced products without containing its cost structure. The evolution of the market forces Cadbury to reduce its costs as it grows. Over the last few years, the company has reduced its workforce, moved factory locations from high-cost to low-cost areas, and improved the cost effectiveness of its supply chain. This is all on the base of a company that was profitable to begin with. (See Diagnose/Costs/Measuring Current Economies of Scale on StrategyStreet.com.)
The British confectionery firm Cadbury dominates the Indian chocolate market. It has 70% market share in the chocolate market and a 30% share of the confectionery market in India. The company began operations in India in 1947. They imported its chocolate bars and sold them to the very wealthy. Later, it developed its own factories in India.
As the Indian market develops, more consumers and potential consumers enter the chocolate market. The growth in the market comes with consumers who live outside the major cities and who have very low incomes. In order to reach these consumers, Cadbury has to offer products that it can sell at very low prices. (See Diagnose/Products and Services/Innovation For Customer Cost Reduction/Four Price Points on StrategyStreet.com.) To meet these new consumers, the company has developed a product called Cadbury Dairy Milk Shots. These are small chocolate balls that are covered with a sugar shell. A package of two of these balls sells for about $.04. But these low-priced products still drive growth.
But Cadbury can not reach these new consumers with very low-priced products without containing its cost structure. The evolution of the market forces Cadbury to reduce its costs as it grows. Over the last few years, the company has reduced its workforce, moved factory locations from high-cost to low-cost areas, and improved the cost effectiveness of its supply chain. This is all on the base of a company that was profitable to begin with. (See Diagnose/Costs/Measuring Current Economies of Scale on StrategyStreet.com.)
Monday, June 29, 2009
Two Pathways to Low Cost
There are two pathways to low cost: Focus on particular customers and their product needs; or create economies of scale. When you combine both, you have a powerful low-cost engine that is also attractive to customers.
Several years ago, I consulted for a high tech company. This company sold components for a much larger technology system. The company’s customers were many times the size of my client. Most of the technology system companies who could have been my client’s customers produced their own component rather than purchasing from a merchant outside supplier like my client.
I asked my client CEO how he expected to out-perform the in-house competitors he faced in the marketplace. He had to be at least as good, if not better, in Function, while being lower in Cost and Price. His answer was focus. His company did nothing else but produce this component. Everyone in his company focused their attention on improving the component and reducing its cost. He argued that his in-house competition did not have the same advantages of focus that he had. His focus would produce lower costs and prices, which would be visible to these larger companies over time. Then his business would grow very rapidly.
I was reminded of this story while reading of a study done by Forrester Research. This study explains some of the changes happening in the outsourcing market.
Several Western companies who had opened centers in India to perform back office work in a cost-saving move have now sold these operations. Several of these companies had decided early-on that they could save the 15 to 20% profit margin that Indian outsourcers typically charge by building their own centers. In many cases, this has proven to be a false economy.
The Forrester Research study estimated that it cost about 25% more for a company to operate a captive center in India rather than to have an outside company provide the same services. In other words, the outsourcing company is able to create a profit for itself that allows it to finance and grow its business, and still charge prices 25% below the costs of the captive center. (See Audio Tip #182: Productivity as a Measure of Physical Costs on StrategyStreet.com.)
How can this be? The answer comes in noting the buyers of these centers. (See Diagnose/Costs/Quantifying Cost Reduction Objectives on StrategyStreet.com.) In virtually every case, the buyer of these centers, which western companies are closing, are large Indian outsourcing firms, such as Wipro Ltd. (See Audio Tip #196: Why Economies of Scale Exist on StrategyStreet.com.) As these Indian outsourcers purchase the centers from the western companies, they gain two important benefits. They acquire experienced employees and guaranteed contracts from the western companies extending for a period of years. These Indian acquiring companies then have the benefit of both focus and economies of scale. This combination will make them an even stronger presence in the market.
Several years ago, I consulted for a high tech company. This company sold components for a much larger technology system. The company’s customers were many times the size of my client. Most of the technology system companies who could have been my client’s customers produced their own component rather than purchasing from a merchant outside supplier like my client.
I asked my client CEO how he expected to out-perform the in-house competitors he faced in the marketplace. He had to be at least as good, if not better, in Function, while being lower in Cost and Price. His answer was focus. His company did nothing else but produce this component. Everyone in his company focused their attention on improving the component and reducing its cost. He argued that his in-house competition did not have the same advantages of focus that he had. His focus would produce lower costs and prices, which would be visible to these larger companies over time. Then his business would grow very rapidly.
I was reminded of this story while reading of a study done by Forrester Research. This study explains some of the changes happening in the outsourcing market.
Several Western companies who had opened centers in India to perform back office work in a cost-saving move have now sold these operations. Several of these companies had decided early-on that they could save the 15 to 20% profit margin that Indian outsourcers typically charge by building their own centers. In many cases, this has proven to be a false economy.
The Forrester Research study estimated that it cost about 25% more for a company to operate a captive center in India rather than to have an outside company provide the same services. In other words, the outsourcing company is able to create a profit for itself that allows it to finance and grow its business, and still charge prices 25% below the costs of the captive center. (See Audio Tip #182: Productivity as a Measure of Physical Costs on StrategyStreet.com.)
How can this be? The answer comes in noting the buyers of these centers. (See Diagnose/Costs/Quantifying Cost Reduction Objectives on StrategyStreet.com.) In virtually every case, the buyer of these centers, which western companies are closing, are large Indian outsourcing firms, such as Wipro Ltd. (See Audio Tip #196: Why Economies of Scale Exist on StrategyStreet.com.) As these Indian outsourcers purchase the centers from the western companies, they gain two important benefits. They acquire experienced employees and guaranteed contracts from the western companies extending for a period of years. These Indian acquiring companies then have the benefit of both focus and economies of scale. This combination will make them an even stronger presence in the market.
Thursday, June 25, 2009
Health Care Costs - Our Future
The debate is about to rage over healthcare costs and coverage. So, what might our future look like?
Let me preface this blog entry with the note that I, personally, believe that healthcare should be available to all of our people. What I will question here is the assumption about the effectiveness of what we are about to do, not whether the ends are worthwhile.
We are about to extend healthcare coverage to 47 million people who are currently uninsured. This 47 million figure is a little over 20% of the population below the age of 65, where Medicare and Medicaid cover health insurance. This is a substantial increase in demand.
By definition, the supply today equals the demand. (See Diagnose/Pricing/Industry Price Outlook on StrategyStreet.com.) In somewhat longer version, this is an equation:
Units of Supply X Cost per Unit = Units of Demands X Price Per Unit
If demand increases, either supply must increase or unit costs must fall, in order to keep the equation in balance. If neither supply increases nor cost productivity improves, then price must rise or demand must be forcibly reduced. We reduce demand by rationing.
There are a number of plans to change our healthcare system in addition to extending the system to 47 million new customers. The government plans to:
* Bar insurers from excluding sick people, an increase in the cost of supply.
* Create a national insurance exchange where people could shop for different plans. One of the plans would be a public plan, like the one that covers Federal workers. This is not really an increase in supply. This new exchange is equivalent to an insurance company. These are agents intermediating between buyers and sellers. There is no increase in healthcare beds or workers in this plan. Rather, it is an increase in the cost of the current supply as we pay for a new government bureaucracy.
* Use information technology and “evidenced-based medicine” to reduce the cost of service. This is a potential real cost savings, if doctors will go along.
* Allow the import of drugs from countries where they are cheaper because they are the result of government negotiations with the U.S. drug firms. There is some chance this could reduce cost because it may force drug companies to demand more payments from foreign governments. This is not a real reduction in the cost. Rather, it is a change in who, in theory, will bear the cost. This may or may not work for the U.S. consumer.
In sum, from the initiatives we have noted, there is a high likelihood that the total cost of supply will rise, even as demand increases by over 20%. But it may be worse than that.
The government financed plan option may drive some of the current insurance companies out of the market. The insurance companies, as private firms subject to stringent public market accounting demands, must account for their long term liabilities under the insurance plans they offer. The government, as we have seen with Medicare and Social Security, is under no such requirement. Without the need to provide for the real long-term cost of the healthcare insurance, it is likely that the government will under-price the cost of the insurance it will offer as an agent. As a result, some of the current agencies, that is, insurance companies, may have to leave the market. This will shift more costs to a government bureaucracy like the one we have in Medicare. Again, the outlook for costs is bleak. Where has the government ever been more efficient as a cost manager than has the private sector?
Returning to our supply/demand equation above, there seems to be very little hope that the cost of future healthcare will fall, or even remain steady, as demand increases. Prices are likely to skyrocket. An alarmed government must then ration healthcare to bring demand into balance with supply at some acceptable price.
However, there is something missing from the discussions to date. Why is there no discussion of an increase in supply that would help alleviate the cost and price pressures, while at the same time, providing more relief to the about-to-be-super-heated demand?
It appears that we could increase supply with a bit more political will. In particular, we could increase the number of doctors over the next few years. In 2007, in the United States, there were 42,000 applicants for medical school. Only 18,000 places were available for these applicants. 57% of our applicants did not find a place in a U.S. medical school. Our political process has restricted the supply. It does take a lot of capability and training to become a doctor. It also takes a lot of ability and training to become a proficient engineer, lawyer, college professor and professional scientist. Do the day-to-day requirements of our medical doctors justify the restriction of the supply that the political system has put on the places in medical schools?
Let me preface this blog entry with the note that I, personally, believe that healthcare should be available to all of our people. What I will question here is the assumption about the effectiveness of what we are about to do, not whether the ends are worthwhile.
We are about to extend healthcare coverage to 47 million people who are currently uninsured. This 47 million figure is a little over 20% of the population below the age of 65, where Medicare and Medicaid cover health insurance. This is a substantial increase in demand.
By definition, the supply today equals the demand. (See Diagnose/Pricing/Industry Price Outlook on StrategyStreet.com.) In somewhat longer version, this is an equation:
Units of Supply X Cost per Unit = Units of Demands X Price Per Unit
If demand increases, either supply must increase or unit costs must fall, in order to keep the equation in balance. If neither supply increases nor cost productivity improves, then price must rise or demand must be forcibly reduced. We reduce demand by rationing.
There are a number of plans to change our healthcare system in addition to extending the system to 47 million new customers. The government plans to:
* Bar insurers from excluding sick people, an increase in the cost of supply.
* Create a national insurance exchange where people could shop for different plans. One of the plans would be a public plan, like the one that covers Federal workers. This is not really an increase in supply. This new exchange is equivalent to an insurance company. These are agents intermediating between buyers and sellers. There is no increase in healthcare beds or workers in this plan. Rather, it is an increase in the cost of the current supply as we pay for a new government bureaucracy.
* Use information technology and “evidenced-based medicine” to reduce the cost of service. This is a potential real cost savings, if doctors will go along.
* Allow the import of drugs from countries where they are cheaper because they are the result of government negotiations with the U.S. drug firms. There is some chance this could reduce cost because it may force drug companies to demand more payments from foreign governments. This is not a real reduction in the cost. Rather, it is a change in who, in theory, will bear the cost. This may or may not work for the U.S. consumer.
In sum, from the initiatives we have noted, there is a high likelihood that the total cost of supply will rise, even as demand increases by over 20%. But it may be worse than that.
The government financed plan option may drive some of the current insurance companies out of the market. The insurance companies, as private firms subject to stringent public market accounting demands, must account for their long term liabilities under the insurance plans they offer. The government, as we have seen with Medicare and Social Security, is under no such requirement. Without the need to provide for the real long-term cost of the healthcare insurance, it is likely that the government will under-price the cost of the insurance it will offer as an agent. As a result, some of the current agencies, that is, insurance companies, may have to leave the market. This will shift more costs to a government bureaucracy like the one we have in Medicare. Again, the outlook for costs is bleak. Where has the government ever been more efficient as a cost manager than has the private sector?
Returning to our supply/demand equation above, there seems to be very little hope that the cost of future healthcare will fall, or even remain steady, as demand increases. Prices are likely to skyrocket. An alarmed government must then ration healthcare to bring demand into balance with supply at some acceptable price.
However, there is something missing from the discussions to date. Why is there no discussion of an increase in supply that would help alleviate the cost and price pressures, while at the same time, providing more relief to the about-to-be-super-heated demand?
It appears that we could increase supply with a bit more political will. In particular, we could increase the number of doctors over the next few years. In 2007, in the United States, there were 42,000 applicants for medical school. Only 18,000 places were available for these applicants. 57% of our applicants did not find a place in a U.S. medical school. Our political process has restricted the supply. It does take a lot of capability and training to become a doctor. It also takes a lot of ability and training to become a proficient engineer, lawyer, college professor and professional scientist. Do the day-to-day requirements of our medical doctors justify the restriction of the supply that the political system has put on the places in medical schools?
Monday, June 22, 2009
New Product in a Fast Growing Industry: Verizon Cloud Computing
Verizon Communications recently announced that it was entering the market for cloud computing. Cloud computing is a service that allows a business to increase its computing power by using the internet, network bandwidth, on demand, from facilities operated by companies like Verizon. This market is fast-growing because it allows businesses to save the costs of building and managing their own computer facilities. Let’s use the Customer Buying Hierarchy to evaluate the prospect for Verizon’s success.
The Customer Buying Hierarchy (see “Video 27: Full Description of How the Customer Buying Hierarchy Works” on StrategyStreet.com) holds that customers buy a product using four categories of evaluation: Function, Reliability, Convenience and Price. Function (see “Video 13: Definition of Function” on StrategyStreet.com) refers to the features of the product that affect how it is used. Reliability (see “Video 14: Definition of Reliability” on StrategyStreet.com) refers to the benefits of the product that assure the customer that it works and will continue to work. Convenience (see “Video 15: Definition of Convenience” on StrategyStreet.com) refers to the ease with which the customer may find and purchase the product. Price is the cash cost the customer pays for the product.
Verizon offers a valuable Function advantage. Cloud computing is a service that today is targeted at large corporations. These corporations use several different types of computers and software applications. Verizon has made a Function innovation leap by offering customers options in setting up their cloud service that would include being able to use various types of computer servers, depending on the software applications the business needed to use. But this is early in the game, so many Function innovations have yet to be introduced.
Verizon, along with its telecom competitor AT&T, does have some real Reliability advantages. These companies have spent years managing network services, data infrastructure and transfer. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.) This gives them real credibility with corporate customers. Verizon and AT&T also have a significant Convenience advantage in their global reach. (See the Perspective, “Convenience: Much Tougher Than it Looks” on StrategyStreet.com.) These two phone companies are able to offer cloud services to overseas divisions of companies.
Pricing is the great unknown. Low prices can move a lot of share in a fast-growing market. Neither Verizon nor AT&T are what you would consider sharp pricing companies in their other businesses. It is unlikely, then, that they will be aggressive price competitors. On the other hand, Amazon also plans to enter this marketplace. Amazon has learned to compete aggressively on Price and may be the eventually price-setter in the market.
This is very early in the development of the cloud computing market. Unique Function advantages may emerge and remain unique due to legal barriers. The early Reliability and Convenience advantages strongly favor Verizon and AT&T with their technical competence, corporate reputations, and global reach. One, or both of them, should be very successful in cloud computing, assuming that they don’t get tripped up with high prices.
The Customer Buying Hierarchy (see “Video 27: Full Description of How the Customer Buying Hierarchy Works” on StrategyStreet.com) holds that customers buy a product using four categories of evaluation: Function, Reliability, Convenience and Price. Function (see “Video 13: Definition of Function” on StrategyStreet.com) refers to the features of the product that affect how it is used. Reliability (see “Video 14: Definition of Reliability” on StrategyStreet.com) refers to the benefits of the product that assure the customer that it works and will continue to work. Convenience (see “Video 15: Definition of Convenience” on StrategyStreet.com) refers to the ease with which the customer may find and purchase the product. Price is the cash cost the customer pays for the product.
Verizon offers a valuable Function advantage. Cloud computing is a service that today is targeted at large corporations. These corporations use several different types of computers and software applications. Verizon has made a Function innovation leap by offering customers options in setting up their cloud service that would include being able to use various types of computer servers, depending on the software applications the business needed to use. But this is early in the game, so many Function innovations have yet to be introduced.
Verizon, along with its telecom competitor AT&T, does have some real Reliability advantages. These companies have spent years managing network services, data infrastructure and transfer. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.) This gives them real credibility with corporate customers. Verizon and AT&T also have a significant Convenience advantage in their global reach. (See the Perspective, “Convenience: Much Tougher Than it Looks” on StrategyStreet.com.) These two phone companies are able to offer cloud services to overseas divisions of companies.
Pricing is the great unknown. Low prices can move a lot of share in a fast-growing market. Neither Verizon nor AT&T are what you would consider sharp pricing companies in their other businesses. It is unlikely, then, that they will be aggressive price competitors. On the other hand, Amazon also plans to enter this marketplace. Amazon has learned to compete aggressively on Price and may be the eventually price-setter in the market.
This is very early in the development of the cloud computing market. Unique Function advantages may emerge and remain unique due to legal barriers. The early Reliability and Convenience advantages strongly favor Verizon and AT&T with their technical competence, corporate reputations, and global reach. One, or both of them, should be very successful in cloud computing, assuming that they don’t get tripped up with high prices.
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